Traditional Litigation Funders
The best-known litigation funders are traditional litigation finance companies. Traditional funders invest primarily in legal claims and have built up vast experience conducting diligence on cases, structuring agreements, and spotting issues that commonly crop up when investing in a claim or group of claims. These companies are often structured similar to hedge funds and invest capital on behalf of clients, though there are notable exceptions to this rule. For example, a company could be publicly traded and invest its own capital and that of its private investors.
There are many benefits to using a traditional litigation funder. Most obviously, since they invest almost exclusively in litigation assets, they know how to structure a transaction and the various pitfalls to avoid. For example, a traditional litigation funder will almost always require a counterparty to enter an NDA before sharing documents or other information, in order to protect the confidentiality of any information shared. These funders also stay up-to-date on new rulings and developments in the litigation finance field. Finally, these funders will not include terms in their contracts designed to control litigation or settlement discussions.
Additionally, a traditional litigation funder provides the claimant and their attorney with an objective and well-informed assessment of the case. Each traditional litigation funder is staffed by former attorneys who perform thorough diligence on the cases they consider financing. While this process can be time-intensive, it provides a comprehensive review of the merits of a potential case. Even if the funder doesn’t ultimately invest, the claimant leaves the process better off, having a clear understanding of the strengths and weaknesses of its case.
Finally, after an investment is made, traditional funders continue to monitor the litigation and, at the counterparty’s request, help litigation counsel talk through various legal issues that arise. At the litigator’s request, these funders may also moot arguments for the cases they fund and provide input on legal strategy. Importantly, since the funders do not control the litigation, they cannot direct legal strategy. Rather, these funders often fashion themselves like an outside litigation expert that can help the litigating attorneys work through issues they otherwise might not see.
In addition to these benefits, litigants should also consider many of the drawbacks to working with traditional litigation funders. The biggest (and one that should be at the top of every users’ mind) is the cost of their capital. Simply put, money obtained from traditional litigation finance companies is not cheap. Traditional litigation funders typically charge more for their financing than hedge fund or family office competitors, which often have greater pricing flexibility. In contrast to those providers, litigation funders are beholden to demanding investors. Indeed, when working with a funder, it is imperative to understand that the party seeking financing is not a client of the funder. Rather, the funder owes duties to its investors to get the best possible terms.
Another drawback relates to the financing process, which is not customer-friendly. The financing process is byzantine, overly complex, and opaque. Funders are often slow to respond and consistently need to secure internal approvals before providing terms, executing a term sheet, and agreeing on final terms. A simple transaction that should take a few weeks at most can often drag on for months due to these administrative issues. Additionally, given that funders are run primarily by lawyers, the underwriting process frequently gets bogged down in discussions about peripheral legal risks of the case, resulting in a robust back and forth between the funder and litigation counsel. This slows down the transaction and, if a case is not properly presented to a funder, can result in the rejection of a case that might otherwise be suitable for financing.